Inside the Senior Housing Debt Market: Q&A
- Oct 13, 2021
Senior housing was one of the most-affected sectors at the outset of the pandemic. But the industry is bouncing back quicker than initial forecasts predicted, John Sweeny, senior vice president of CBRE Senior Housing Capital Markets, told MHN.
Considered the “gold standard” for mitigation and prevention methods implemented through the health crisis, the senior living sector is appealing to investors and lenders alike.
“Attractive debt capital is available for acquisitions, bridge opportunities, new construction and permanent financing,” Sweeny noted.
Here’s what else Sweeney had to say about the state of the market and what to expect in the coming quarters.
READ ALSO: What Is Driving Growth in Senior Housing?
What are the top three capital markets trends you’re seeing in the senior housing industry?
Sweeny: The advent of vaccines and improving fundamentals have resulted in a narrowing of the bid/ask spread. The first and second quarters of 2022 are shaping up to see record amounts of new listings.
And a great deal of liquidity raised to target the sector needs to find a home as soon as possible.
We’ve seen little distress so far, as banks and sponsors were well-capitalized going into the pandemic. The pandemic was no one’s fault, and as a result, the government, banks and investors worked together fast to limit issues and shore up liquidity.
What should investors know about available liquidity in the senior housing debt market?
Sweeny: The debt capital markets have continued to improve over the past nine to 12 months. Banks (both national and regional), debt funds, insurers and GSEs are back in the market and are actively lending on both age-restricted and traditional senior living. Attractive debt capital is available for acquisitions, bridge opportunities, new construction and permanent financing.
Rates also continued to compress during that same time frame and are close to pre-pandemic levels. Compelling debt is available, particularly for folks who have a successful track record in the sector.
Have terms changed significantly due to the current economic context?
Sweeny: There is certainly more lender attention to detail regarding both property-level performance and underwriting, and COVID-19-related questions such as vaccination status among residents and staff. As previously mentioned, loan terms and rates have substantially improved when compared to 2020.
Lenders are, by and large, back at the table providing necessary liquidity in the marketplace. Lenders are inherently more comfortable making loans in the current environment, largely due to the advent of the COVID-19 vaccine, even with the subsequent increase in the delta variant.
Senior living owners and operators have substantial systems in place to ensure it does not spread throughout their communities and have demonstrated the ability to stomp it out quickly within their walls.
What are the main lessons senior housing investors/lenders have learned over the past 18 months?
Sweeny: Given the resident profile within a senior living context, owners and operators worked tirelessly to protect those most vulnerable to COVID-19. Those efforts have paid off for both investors and prospective residents and their families. The senior living industry has been the gold standard for appropriate plans and procedures. This has been noticed by lenders and investors alike.
The value proposition is still there from a care, service, social and health programming perspective, as evidenced by the substantial waitlists that developed during the pandemic. This has aided in quick recovery in the senior living sector and has fueled significant activity across the space. It is a resilient industry that has rebounded quickly.
Prior to the pandemic, assisted living was recognized as the most recession-proof asset class, considering it is a needs-based operating business. That perception was certainly challenged during the pandemic given what transpired in respective portfolio NOIs and occupancies across the country.
That said, we are in the midst of an industrywide rebound that is occurring at a much quicker pace than many—including certain equity analysts—predicted. It is a testament to the strength of the sector.
How has transaction volume shifted this year compared to 2020?
Sweeny: 2020 merger and acquisition volume was down approximately 80 percent. Mostly strategic deals closed, with REITs and private equity buying previously owned assets and strategic portfolios with key operators.
Investors are increasingly becoming more interested in senior housing, especially given the aggressive valuations in sectors that thrived during the pandemic (i.e., multifamily). Return expectations are generally 200 plus basis points premiums. The demo wave is finally approaching the mid-to-late 20s and investors see the tailwinds.
What are the main challenges that will shape the capital markets for seniors housing going forward?
Sweeny: We anticipate continued strength in leads, move-ins, and measured velocity until the delta variant subsides and the labor market returns.
Labor is the largest challenge facing the industry, which is placing emphasis on ways to mitigate these challenges through education, training, flexible hours and salaries, increased pay and rightsizing essential responsibilities.
While supply chain disruptions are driving up costs, every industry is experiencing these challenges. We expect these to decrease by mid-2022. And the overall housing market’s strength is supporting the medium- and long-term outlook.